imported>Doug Williamson |
imported>Doug Williamson |
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| A straight-line estimation method for determining an intermediate value.
| | Newer version of CHAPS (Clearing House Automated Payment System). |
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| __TOC__
| | == See also == |
| | | * [[Clearing House Automated Payment System]] |
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| <span style="color:#4B0082">'''Example 1: Interpolation'''</span>
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| Consider a set of cashflows which has:
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| Net present value (NPV) of +$4m at a yield of 5%.
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| NPV of -$4m at a yield of 6%.
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| Using linear interpolation, the estimated yield at which the cashflows have an NPV of $0 is given by:
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| 5% + ( +4 / ( +4 - -4) ) x (6 - 5)%
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| 5% + ( +4 / +8 ) x 1%
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| 5% + 0.5%
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| = '''5.5%'''. | |
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| 5.5% is the estimated internal rate of return (IRR) of the cashflows.
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| ==Interpolation and Iteration== | |
| Interpolation is often used in conjunction with Iteration.
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| Using iteration, the straight-line estimated IRR of 5.5% would then be used, in turn, to recalculate the NPV at the estimated IRR of 5.5%, producing a recalculated NPV even closer to $0.
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| 5.5% and the recalculated NPV would then be used with interpolation once again to further refine the estimate of the IRR.
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| This iteration process can be repeated as often as required until the result converges on a sufficiently stable final figure.
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| ==Extrapolation==
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| Another closely related linear estimation technique is extrapolation.
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| This involves the straight-line estimation of values outside the range of the sample data used to do the estimation with.
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| <span style="color:#4B0082">'''Example 2: Extrapolation'''</span>
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| Using the following data to estimate net present value (NPV) at a yield of 7%, using extrapolation:
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| NPV of +$4m at a yield of 5%.
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| NPV of -$4m at a yield of 6%.
| | [[Category:Cash_management]] |
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| '''''Solution'''''
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| Based on the sample data, for every 1% increase in the yield, the NPV moved by:
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| -$4m - $4m = -$8m
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| Extrapolating this trend to a yield of 7%, this is a further increase in the yield of 7 - 6 = 1%.
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| The NPV would be modelled to fall from -$4m to:
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| = -$4m - $8m
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| = -$'''12m'''.
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| == See also ==
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| * [[CertFMM]]
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| * [[Internal rate of return]]
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| * [[Interpolation]]
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| * [[Iteration]]
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| * [[Linear]]
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| * [[Straight line]]
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